Toward a Clarification of the Block-Demsetz Debate on Psychic Income and Externalities

Abstract

For over a quarter of a century, one small corner of the voluminous literature on the Coase theorem has been the scene of an animated and, at times, heated debate between Walter Block and Harold Demsetz. Over the entire course of the debate, Block (1977, 1995, 2000) has argued that when individuals have only psychic income with which to maintain their property rights, the Coase theorem fails. And Block (1977, 1995) holds the position that his psychic income case represents a conceptually distinct qualification to the Coasian position. Demsetz (1979, 1997) maintains that Block’s case against the Coase theorem, at least in its weak form, involves nothing more than a demonstration of the potential importance of income effects and as such does not constitute a conceptually distinct qualification.